Tim Bond at Barclays in London thinks investors should start selling down their government bond positions due to demographic reasons, according to the Barclays Wealth Equity Gilt Study 2010.As populations become increasingly mature, ‘the abundance of savings will decrease’ according to Mr. Bond:
“Over the next two decades, the boomer generation will age into retirement and run down their accumulated savings. An era of capital abundance will gradually turn into an era of capital scarcity. Government debt burdens will rise sharply, with the risk premium demanded for financing these debts increasing as private sector net savings flows dwindle. Given the broad international context for these trends, with similar developments afflicting almost all the world’s major economies, the means by which the government debt burdens are eventually curtailed is unclear. As a result, government bond yields are likely to require a significant rise in risk premia to cover the eventuality of default, either outright or through inflation.“
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Fair enough, but one can’t avoid being a bit sceptical about his recommendation to move into (high fee generating) structured products:
“We are suggesting investors should think about structurally underweighting government bonds and reducing benchmark weightings in the asset class as a long-run strategy,” says Bond. Despite his previous caution about investing in structured products, he now says they could be a good addition to a portfolio.
“They can be helpful to express specific views. Simple products where you get leveraged returns can be good in your portfolio. But there are other products that are structured to reflect views that might change over time. They might look like a good idea but their illiquidity goes against them for an investor if they change their mind.”
The message is clear — Don’t trust government bonds, trust structured products.